Aftermarket acquisitions in the second decade of the new millennium got off to a fast start. Aviation consolidation in early 2011 has been “even more robust than we predicted,” summarizes Chris Doan, president and CEO of TeamSAI. “Activity in the first month of 2011 is equal to that of the first quarter in 2010.” Doan sees that strength continuing throughout the year and predicts its aerospace acquisitions will double or triple the number in 2010.

The pick-up is cyclical. “The market clearly feels that the corner has been turned, and we are in the up cycle of airline traffic and maintenance,” Doan stresses. This makes it a favorable time for buyers to move—but not necessarily sellers. Pricing multiples are usually based on the earnings before interest, taxes, depreciation and amortization (EBITDA) of the prior year, and these have been low. Sometimes buyers will attempt to get a multiple of a predicted and healthier EBITDA, but they do not always succeed.

TeamSAI is seeing multiples of six to eight times recent EBITDA now, and Doan does not think that will change much during 2011. He predicts the year will continue as mostly a buyer’s market. Doan says the majority of acquisitions are still strategic or bolt-on deals, often part of a roll-up of several such deals, but there also have been some private-equity transactions.

“There is lots of confidence in aftermarket recovery,” says Kenneth Herbert, VP of research at Wedbush Securities. He still sees acquisitions focusing more on parts and distribution firms than on maintenance shops, especially airframes. “Maintenance has labor and capacity issues, and there is pricing pressure in North America,” Herbert says. "It is a lot easier to see how to grow the business in parts and distribution.”

Herbert sees a possible doubling of acquisition transactions in 2011, compared to 2010. Unlike Doan, he sees multiples going up. He doubts there will be many deals at the 12-13 times EBITDA level—the price Alcoa paid for McKechnie Aerospace. “But you could see some at eight to 10.”

Herbert expects Transdigm will forge one or two more deals this year. “They like to get companies that are sole-source suppliers to airlines, take costs out and boost prices,” he says. "They have a very good track record with acquisitions.” He expects more efforts by European firms to acquire U.S. assets and looks for firms like AAR, Goodrich and Triumph to be active. “Triumph may do something once they have digested Vought. They are a serial buyer.” And he expects private equity to accelerate its activities this year.

Scott Thompson, U.S. aerospace & defense leader at PriceWaterhouseCoopers, saw 2010 as a very strong year in aerospace acquisitions with more than $20 billion in value, which is about the same as in 2008, although only half the 2007 level. Thompson looks for modest further gains in value in 2011.

Reduced Pentagon budgets mean aerospace firms can boost military revenue significantly only through acquisitions, Thompson notes. “I do not think you will see consolidation in the top 10 aerospace and defense companies, but there could be some consolidation outside the top 10.”

Thompson sees “tons of private equity in the market now.” He points out that half the top 10 deals in 2010 were either purchases or sales by private-equity firms. “Private equity is playing big again.” While there is some downward pressure on multiples for defense firms due to budget pressures, Thompson thinks commercial growth could push multiples for this segment higher.

Analyzing The Market

Recent deals illustrate the points made by analysts and clarify some of 2011’s likely patterns.

GA Telesis acquired Ultimate Aircraft Composites in January, and is likely to do many more acquisitions, according to President Abdol Moabery. “We see great growth in the next five years, and part will come from acquisitions,” Moabery says. “If you try to grow organically 30-40% per year, you will run into problems. But you can do it with acquisitions and have fewer problems.” Of course, it helps that GA Telesis is affiliated with Bank of America and Merrill Lynch.

The firm now does aircraft and engine leasing, component support and component repairs, and serves almost all major commercial fleets. (See pg. 55 for more.) Moabery sees growth in all three segments and is looking at acquisitions in all of them. For part and maintenance acquisitions, GA Telesis targets companies at three to eight times EBITDA. “Some companies sell at up to 10-13 times, but these are being bought for strategic reasons,” Moabery says.

Some companies are for sale because they have run out of financing. Moabery usually stays clear of these targets because they have been undercapitalized. Similarly, he does not like to buy firms when the founder is retiring. “It is hard for us to know enough about the business.”

What is Moabery looking for? Most often, GA Telesis seeks firms that wish to be acquired because they have not been big enough to penetrate the major airline market. “These tend to work for us,” he says. “We just have the same sales guy selling more services to customers.”

Size surely counts in the modern aftermarket. “It comes down to economies of scale,” Moabery stresses. “Bigger companies can borrow money cheaper and offer leases on better terms. Bigger part buyers get parts cheaper. Bigger repair firms can become one-stop shops, and customers need fewer people to manage them.”

GA Telesis’s strategy seems to be working and has impressed veteran observers. “Five years ago they were nobody, [and] now they seem to be growing fast,” Doan says. “We think they know the business.”

In January, Atlanta-based Precision Aviation Group acquired Dallas’ Avcenter. “We wanted to grow our MRO capability and do wheels and brakes internally,” explains Managing Director Scott James. Precision, which generates about $75 million in annual revenue, repairs instruments and stocks rotables for fixed-wing and helicopter fleets.

“We hope to do more acquisitions,” James says. In fact, on March 3, the company acquired Gardner Aviation Specialists, an FAA repair station specializing in avionics installations. The purchase not only gives Precision more avionics and airframe MRO capabilities, but it also comes with 22 OEM relationships. James is seeking to add a facility on the West Coast and was thinking about another in Vancouver, B.C., as well.

However, “it is a real pain in the butt to do an acquisition,” James says. “The toughest part is getting through due diligence and finding out all the skeletons in the closet. If you are buying an entrepreneur’s shop, they run them out of their back pockets.” For example, Precision found one acquired firm did not carry sufficient liability insurance. “When we get one of these entrepreneur’s shops, we have to clean it up.”

Negotiating price is less difficult, says James. “He says he wants ‘X’, and you say we can’t pay ‘X.’” Precision usually pays three to five times EBITDA for entrepreneurial companies, depending on how clean they are. “The one we are looking at now is clean, so it will be close to five times.”

Consolidation Sweepstakes

James expects to see considerably more consolidation in the aerospace aftermarket. “Component manufacturers are trying to drive independent shops out of business, so you have to have size to survive,” he says.

James also sees consolidation within the OEM market, pointing to Transdigm’s acquisitions of other aviation manufacturing firms. “Their philosophy is to buy up companies with a monopoly on a part, then double or triple the price.” Only reverse engineering of parts by firms like Precision can frustrate that strategy.

Precision itself was acquired by private equity three years ago and has been growing 15-20% per year since then. “Private equity gave us a higher level of financial sophistication,” James says. “It taught us how to look at a company and how to buy them.” He hopes that its new owners hang on to Precision for more years of growth.

There are of course some very familiar players in the consolidation sweepstakes. Recently, AFI KLM Engineering & Maintenance increased its stake in Florida’s Aero Maintenance Group and bought a 26% stake in India’s Max Aerospace & Aviation.

Ludovic Loisel, VP strategy & coordination, explains these moves as consistent with his company’s desire to build a network of wholly or partly owned MRO assets. The network has long included CRMA for engine part repairs, Epcor for APUs and components, and an airframe shop and technical training facility in the U.K. (KLM U.K. Engineering).

More recently AFI KLM E&M has invested in AMG, which repairs components in Miami, Atlanta, and Dallas; in Turbine Support International, which dismantles engines in Atlanta; and in a joint venture with Aircelle to work on nacelles in Dubai. ATI, a joint venture with Royal Air Maroc, provides lower-cost airframe checks on narrowbodies.

The latest investment in India’s Max brings work on some components closer to customers. “Lots of support requires the scale of home-base repairs and good logistics,” Loisel explains. “But for some components you must be on the spot.”

AFI KLM E&M wants to continue getting closer to customers, and Florida is a good location to serve Latin American airlines. “We would like to do something in China, but we need something that makes sense and good partners,” Loisel says. His company wants a stronger presence in emerging markets and also seeks to recapture some of the European airframe market with low-cost facilities, as in Morocco.

The AFI-KLM E&M exec expects to see further aftermarket consolidation. “Many airlines want to get rid of shops, for example Finnair,” says Loisel. Airline mergers also will present opportunities for consolidation of maintenance assets. Finally, finance also argues for consolidation. “You need to give more to customers, buying or financing parts along with the deal. You have to give some offsets.”

In January, Heico acquired Blue Aerospace, which distributes parts to military customers. Heico has pretty much exhausted possible PMA acquisitions, according to Co-president and CEO Eric Mendelson. “We are still seeking distribution, manufacturing, repairs and electronics,” he says. “We have a pipeline, and we are working with them.”

Heico generally pays five to six times EBITDA for its acquisitions. Mendelson says he would be careful of acquisitions that were changing management, as in the case of a retiring founder. “If we know the business, we might buy it. But if we were not in the business, we would not.”

And there is still some resistance among sellers. In February, Ross Aviation acquired a fixed base operation (FBO) in Fresno, Calif., from Atlantic Aviation. Ross now owns and operates 14 FBOs. “There were three operators in Fresno, and we bought one of the competitors,” explains COO Greg Ross. “It was not an MRO acquisition, but an FBO for fuel and hangars.”

Ross says 2011 is not such a great time to pick up aviation assets—maintenance or otherwise. “Sellers do not want to sell at what we regard as reasonable prices. They got high multiples before 2008, and if they are a survivor, they do not want to sell for a lower multiple.”

So, consolidation likely will continue, slowed down a little by disagreements over price, loss of original owners or the process of cleaning up operations. But a less fragmented aftermarket seems to be coming steadily into view.

Annual Aerospace and Defense Deal Activity(Measured by number and value of deals 2001-2010)Annual Aerospace and Defense Deal Activity(Measured by number and value of deals 2001-2010)
Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Number of deals 232 179 209 231 240 229 296 302 296 308
Total deal value ($ billions) 13.8 14.2 14.7 24.6 15.9 22.4 42.1 21.6 10.9 20.2